Partnerships often use property owned by or contributed by partners. Valid compensation strategies in such instances require careful advance planning to avoid the disguised sales rules created by Congress and the IRS to correct abuses in this area. Professor Richard W. Harris walks practitioners through the potential minefields of IRC §§ 707(a), 707(c), and 702(a) with numerous examples and sample calculations that show how to avoid problems. This article from a recent issue of CCH’s Journal of Passthrough Entities, covers payments, preferential distributive shares and disguised sales of property. Harris outlines strategies for avoiding the disguised sale rules and looks at what fits under the definition of “reasonable” compensation.

 

Professional practices and licenses, such as law degrees and CPA designations, certainly have a value to them and such values should be a consideration in the equitable division of the marital estate in a divorce proceeding. But such cases can also demonstrate the potential for some wildly off-base calculations and the use of “voodoo valuation” practices, according to Michael A. Paschall in a recent issue of Business Valuation Alert newsletter. Divorce cases will often see the introduction of seemingly well-reasoned valuation studies when it comes to assigning a value for a partnership interest in a professional practice or the value of a professional license. Sometimes, though, the underlying logic of these valuations can be deeply flawed and the result will be far from an equitable division of property if a family court judge buys into that faulty logic. Paschall walks through case law and some colorful real-life examples to help practitioners find the pitfalls in this contentious area of valuation practice.

 

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One of the stickiest areas of tax practice is determining if a taxpayer’s passion is a hobby or a business for tax purposes. Of course, the IRS cares little about such questions when taxpayers profit from their hobbies-the ready answer is that such profits are always taxable. Losses, however, are a different issue and taxpayers who lose money in the course of their hobbies often find that they are unable to write off those losses for tax purposes under the weight of much Tax Court precedent and IRS regulations and interpretations. In TAXES: The Tax Magazine, Professor Paul J. Brennan outlines the history, current thinking and many contradictions in how the Tax Court has looked at whether an enterprise is a hobby or a business for tax purposes.

 

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Outbound sales by a U.S. corporation into a foreign country require considerable up-front planning to ensure the best possible tax treatment. U.S. sellers must look closely at their business objectives and their individual tax picture when determining the appropriate structures to use in classifying outbound sales, according to attorneys David Buss, David Hryck, and Robert Rothman in a recent issue of TAXES: The Tax Magazine. Practitioners must begin with two fundamental questions:

• Will the earnings from foreign sales be repatriated or will they remain abroad for a significant period of time?
• Is the effective tax rate in the foreign country lower or higher than in the U.S.?

Buss, Hryck and Rothman walk practitioners through potential answers to each of those questions and how those answers will affect the tax planning process. They use specific scenarios to demonstrate the planning techniques that must be used.

 

 

The hype and hoopla of a new business moving into an area often includes the use of tax incentives to help that business choose one locale over another. But some recent examination of such incentives and failures of some businesses to meet the promises of jobs created has brought on a new wave of corporate accountability. Despite recent legal attacks on incentives, they are not going away and state and local officials will continue to use them to attract business. But the critical factor now becomes making sure the requirements of those incentive agreements are met after the publicity dies now, notes a recent article in CCH’s Property Tax Alert. Experts interviewed by CCH editors note that the real change in this area is follow up by the state and local agencies responsible for economic development. The real effect of economic development is now part of the overall consideration by these officials, who feel the heat of accountability and are passing that on to businesses. But it’s easy to meet these standards by simply making tracking and verification part of the incentive process, these experts noted.